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Private Credit 

Fabian Graber

Ops, the European Central Bank did it again. Elizabeth McCaul, an ECB supervisory board member, has warned this week of “caution lights in front of us” caused by the non-bank financing space in Europe, in an interview with the Financial Times. The fast growth of this sector – which has assets of around €42.90trn in the EU versus €38trn controlled by banks – was “something that always worries us”, McCaul was quoted saying.

Private credit only makes up around €1.65trn globally according to PitchBook, a tiny fraction of the massive, so-called non-bank financial intermediaries (NBFI) market in the EU that includes everything from family offices, supply chain finance, pension funds and insurance companies to capital markets. But private credit bankers and lobbyists are on high alert whenever the ECB has a go at NBFI, not least because the regulators in Frankfurt have increasingly singled out private credit in the last few months.

In May, the ECB put out a paper as part of its current Financial Stability Review looking at private markets. It concluded that private credit providers and their like “still need to prove their resilience in an environment of higher interest rates” and that, while risks to overall financial stability appear limited despite the growth of private markets, “risks may lurk in concentrated exposures”. Private credit CLOs and NAV lending will be monitored more closely, according to the ECB paper.

“I tend to disagree that there isn’t a track record of private credit being able to perform successfully also in turbulent times,” said Jiri Krol, the deputy CEO of the Alternative Investment Management Association, which represents the European private credit industry, to 9fin. “Maybe in the EU, private credit hasn’t been around before the Global Financial Crisis [2007-2008], but in the US it has a fairly long pedigree and there is data going back to around 2004,” said Krol, who is also the deputy CEO of the Alternative Credit Council.

There haven’t been material losses within private credit and the growth of the space is based on its success, according to Krol. “The banking model is inherently instable. It’s interesting to hear bank regulators then saying there are potential risks in the private credit space. They keep on coming up with newer and newer issues to worry about. But if you come up with more and more data [to counter that], they still say that something else could happen,” commented Krol. “We struggle to see where the problems are”.

For sure, there’s much at stake currently for the European private credit space. The EU has started assessing whether to subject private market participants, frequently dubbed “shadow banks”, to ECB regulation, similar to traditional lenders. A consultation is under way until November, addressing questions including whether the NBFI space should be the target of “macroprudential measures”, which would essentially put it under ECB supervision. That would likely mean far-reaching requirements for transparency, higher costs linked to regulation and potentially the end of “private” in private markets and private credit.

Interestingly, the main development that does put stress on levered capital structures, including those financed by private credit providers, is the massive increase in interest rates that the ECB itself launched two years ago.

AIMA’s Krol said that the portfolios of private credit managers are experiencing more stress because of higher interest rates and that the problems probably haven’t peaked yet. “There will continue to be individual cases of underperformance but that’s normal, that’s to be expected. Generally, things are under control and we’re seeing a healthy pipeline of new deals,” he said.

Speaking of pipeline: The summer holiday season is in full swing but not yet for the English and Spanish football teams who will meet for the final Euros game on Sunday — and neither for private equity giant KKR who is in talks with direct lenders to provide financing for its £1.1bn buyout of festival organiser Superstruct Entertainment.

Anyone involved in the sale of Dutch testing, inspection, and certification firm Sansidor will have more time now to focus on the process after the Netherlands dropped out from football this week (het spijt ons!) as sponsors IK Partners, KLAR Partners, and Rivean Capital prepare their final offers.

Summer break also means transfer season kicking off, with CPPIB having promoted Ben Mason to head of European credit, replacing Derek Jackson, who is heading to Apax Partners as the firm seeks to build out its global private credit offering. In Germany, UK-based advisory firm Marlborough Partners, hired Sebastian Achleitner to boost its Frankfurt office. Meanwhile, Robin Jarratt, global head of credit at GIC, is retiring from the Singapore’s sovereign wealth fund after a 19-year stint.

But school’s definitely out — and as newly elected Labour prime minister Keir Starmer looks to end the 20% VAT exemption for private schools, some private credit firms already brace for a hit to one of its favourite sectors in the UK.

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Taking the Credit — ECB pressure has private lending on high alert

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